S&P cuts Loral

Standard & Poor's downgraded Loral Space & Communications Ltd. and put some ratings on CreditWatch with negative implications. Ratings affected include Loral Space & Communications' $350 million 9.5% senior notes due 2006, cut to CCC- from CCC+, $745 million 6% convertible preferred stock due 2006 and $400 million 6% convertible preferred stock due 2007, cut to C from CCC and put on CreditWatch, and Loral Orion Inc.'s $37 million 11.25% senior notes due 2007, $49 million 12.5% discount notes due 2007 and $613 million 10% senior notes due 2006, cut to CCC+ from B.

S&P said the downgrades were based on concern about Loral's liquidity and weak customer demand in the company's satellite leasing and manufacturing businesses.

The downgrade and CreditWatch placement of the preferred stock is in response to the company's commencement of an offer to exchange cash and common stock for each share of its series C and series D preferred stock. S&P said it considers the exchange offer, which represents a deep discount to the liquidation preference of the existing preferred stock, tantamount to a default on the preferred stock issues. If the exchange is completed, the corporate credit rating on Loral will be lowered to SD and the preferred stock will be lowered to D. Subsequent to completion of the exchange offer, assuming no further unexpected developments, the corporate credit rating will likely be raised to CCC+, reflecting the company's still heavy debt burden and weak business conditions.

Although successful completion of the exchange offer will improve Loral's balance sheet and modestly help cash flow by reducing dividend obligations, the offer could consume up to $22 million in cash if all preferred stock is tendered, S&P said.

Loral's liquidity will remain strained. The company expects to have roughly $100 million in cash and borrowing availability at year-end 2002, not accounting for cash used in the exchange offer, down from $180.7 million at June 30, 2002.

S&P said it is concerned that the company could exhaust its remaining liquidity in 2003 given the potential for continued industry weakness. The company still faces financially much stronger rivals in the competitive satellite leasing and manufacturing businesses.

Loral's satellite transponder leasing business, which offers high margins and is the company's primary cash generator, is experiencing declining demand and pricing amid industry overcapacity and the weak economy, S&P noted. Continuing economic uncertainty could delay any demand stabilization. Despite the leasing business' inherent revenue stability from long-term contracts, second quarter revenue fell 8.8%, year over year, while EBITDA declined 13.4%, due to contract terminations. The company is also projecting a full year single-digit percentage revenue decline and reports that new and renewal pricing is down about 10% from last year.

Moody's lowers Tesoro outlook

Moody's Investors Service lowered its outlook on Tesoro Petroleum Corp. to negative from stable, affecting $2 billion of debt. Ratings affected include Tesoro's $225 million secured bank revolver due 2006, $250 million secured term loan A due 2006 and $750 million secured term loan B due 2007, all at Ba3, and its $450 million senior subordinated notes due 2012, $300 million 9% senior subordinated notes due 2008 and $215 million 9.625% senior subordinated notes due 2008 at B2.

Moody's said the outlook change reflects its expectation of continued cyclically weak refining margins combined with traditional seasonal winter margin weakness in the forthcoming fourth quarter of 2002 and first quarter of 2003.

Tesoro's financial position has deteriorated substantially following the prior four quarters of weak refining margins and the company's expensive and leveraged 2001/02 acquisitions of refineries and related assets, Moody's said. The company negotiated its credit facilities at a time of greater optimism and included covenant levels that cannot be met in the current operating environment under its debt burden.

Moody's said it may downgrade Tesoro even if covenant adjustments are approved if the resulting covenant levels potentially bring into question Tesoro's ability to access the revolver for letters of credit and borrowings.

Also potentially prompting a downgrade would be failure or delay in generating proceeds from planned near-term asset sales, any unexpected operational issues that negatively impact cash flow, continued severe cyclical market weakness, and/or increased credit requirements to backstop crude purchases, the rating agency added.

A favorable consideration is that Tesoro to date has been able to avoid any sizeable drawings under its revolver and has managed its credit exposure to suppliers to keep letter of credits at minimal levels, Moody's said.

S&P puts William Carter on positive watch

Standard & Poor's put The William Carter Co. on CreditWatch with Positive implications. Ratings affected include William Carter's $60 million revolving credit facility due 2006, $125 million term loan due 2008 and its $175 million 10.875% notes due 2011, all at B-.

S&P said the CreditWatch placement reflects the company's intention to sell shares of common stock and use the majority of proceeds for debt reduction, as well as for its improving operating performance, which has exceeded S&P's expectations.

S&P cuts HealthSouth to junk

Standard & Poor's downgraded HealthSouth Corp. and kept it on CreditWatch with negative implications. Ratings lowered include HealthSouth's $250 million 6.875% senior notes due 2005, $250 million 7% senior notes due 2008, $375 million 8.5% senior unsecured notes due 2008, $200 million 7.375% senior notes due 2006, $400 million 8.375% senior notes due 2011, $1 billion 7.625% notes due 2012 and $1.25 billion senior unsecured revolving credit facility due 2007, all cut to BB from BBB-, and its $568 million 3.25% convertible subordinated debentures due 2003, cut to B+ from BB+.

S&P said the downgrade is in response to expected weaker cash flow from HealthSouth's outpatient rehabilitation operations related to Medicare billing revisions, which the company must now adopt, and S&P's concern about the potential fall out from a just-announced SEC investigation of its activities.

HealthSouth's adoption of Medicare's billing methodology regarding reimbursement of outpatient therapy services to patients as group rather than individual therapy, could reduce earnings before interest, depreciation and amortization by $175 million, S&P noted. The company's longer-term ability to adapt its outpatient activities to these payor pressures is uncertain.

The SEC probe of HealthSouth's activities adds risk to a credit profile that may become even more dependent on its less-profitable rehabilitation services by virtue of the spin-off of its outpatient surgery division, which is under current consideration, S&P said. Although the company voluntarily contacted the SEC, it is likely that an investigation would have been initiated by the SEC, nonetheless.

S&P raises Scotts outlook

Standard & Poor's raised its outlook on The Scotts Co. to positive from stable and confirmed its ratings including its senior secured debt at BB and subordinated debt at B+.

S&P said the revision reflects its expectation that Scotts will further improve its financial profile. The ratings could be raised if "the company can demonstrate a sustainable improvement in its credit protection measures during the outlook period," S&P added.

While Scotts is expected to improve leverage after a planned sale of 4.2 million shares, the proceeds of which would be used primarily for debt reduction, the company will be challenged to continue improving its operating performance, S&P said. This challenge includes the implementation of its recently announced multiyear international restructuring plan.

S&P said Scotts' credit protection measures (adjusted for operating leases) have improved and are more in line with its rating. For the trailing 12 months ended June 30, 2002, EBITDA coverage of interest was about 3.5 times, with debt to EBITDA of about 3.1x.

Moody's cuts Vantico

Moody's Investors Service downgraded Vantico Group SA, affecting $690 million of debt including its €250 million 12% senior notes, cut to Ca from Caa1, and Vantico International SA's bank debt, cut to Caa1 from B2. The outlook remains negative.

Moody's said the downgrade reflects the significant restructuring risk for bondholders following Vantico management's announcement it has hired Close Brothers Corporate Finance to assist in negotiations with its banks and to assess various restructuring options, Moody's expectation that Vantico is unlikely to meet its Q3 bank covenants and hence the need for a successful renegotiation of existing financial covenants only six months after a new covenant package, and concerns about the deteriorating liquidity position of the group and the expectation that in the absence of an improving economic environment and cash inflows from improving working capital management Vantico may soon need a further capital injection to shore up its liquidity position.

Based on the hiring of Close Brothers, Moody's said it believes a restructuring of the balance sheet is highly probable. Moody's considers it unlikely that shareholders and banks will continue to support the group under its current capital structure.

A restructuring would likely translate into material losses for par bondholders in a distress situation given their structural subordination to CHF577 million in drawn bank debt, the rating agency added.

Moody's puts Holley Performance on review

Moody's Investors Service put Holley Performance Products, Inc. on review for possible downgrade including its $150 million of 12.25% guaranteed senior unsecured notes due September 2007 at Caa2.

Moody's said it began the review after Holley failed to make its $9.1875 semiannual bond interest payment due on Sept. 15. To avoid a default the company must pay the interest within the 30-day grace period.

Holley's effectively available liquidity under its credit facilities with Foothill Capital is currently constrained by provisions within the loan and security agreement itself and to an even greater degree by additional indebtedness restrictions within the note indenture, Moody's said.

Holley's business has furthermore been disrupted by recent changes to the senior management team, Moody's continued. Effective August 2002, Holley has a new chief executive officer and new chief operating officer. The company is additionally in the midst of conducting a search to permanently fill its vacant chief financial officer position, but has just put an interim chief financial officer in place.

Holley's operating performance has continued to lag well behind both projected levels and prior year results, Moody's said. This is attributable to weak demand related to the general economic slowdown, continued customer inventory reduction programs, and an acceleration of the market's declining need for remanufactured carburetors.

Holley has announced that it is working with an affiliate of an investment fund managed by Kohlberg & Co., LLC, the indirect parent of the company, to raise additional funds in time to satisfy the bond interest payment default and to support operations until market conditions improve and the new management team can take steps to further improve internal operating efficiencies, Moody's said. The Kohlberg Fund has reportedly committed to up to an additional $15 million of capital available to the company. The additional capital will be used to fund the past-due semiannual notes interest payment on the company's outstanding 12.25% senior notes due 2007, as well as the company's working capital needs.

S&P cuts Superior TeleCom

Standard & Poor's downgraded Superior TeleCom Inc. including cutting its $500 million term loan A due 2004, $425 million term loan B due 2005 and $225 million revolver due 2004 to SD from CCC. The subordinated debt continues at CC and the preferred stock at D.

S&P said the downgrade follows Superior TeleCom's announcement that it has amended its debt payments in order to reduce its burdensome 2003 principal amortization schedule.

The announced amendments will allow the company to reduce principal amortization and adjust financial covenants through 2003, sell its electrical wire business, defense electronics subsidiary DNE Systems Inc. and 51% interest in Superior Cables Ltd. to The Alpine Group Inc. (which owns 49% of Superior Telecom's equity) for $85 million plus an additional $30 million to $35 million in tax benefits in 2003 as well as a 20% equity warrant position in the electrical assets being sold.

S&P said it deems the restructuring of debt service tantamount to a default. S&P added that it expects to assign a rating to the restructured debt obligations soon.

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